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Private Property from Soweto to Shanghai

NOVEMBER 01, 1989 by DAVID BOAZ

A trip around the world provides evidence of just how wrong Harvard economist John Kenneth Galbraith was in his influential book The Affluent Society. (Granted, one need not go nearly so far to find such evidence.) Galbratith observed that everywhere one looked, privately provided goods and services — homes, automobiles, factories, "handsomely packaged products" — were clean, shiny, and of high quality. Yet publicly provided services–schools, parks, streets–were old, overcrowded, and poorly maintained. Galbraith called it "an atmosphere of private opulence and public squalor."

From those accurate if unremarkable observations, Galbraith drew the remarkably misguided conclusion that the problem was too little spending on the public sector. It seems astonishing today that a brilliant man could have gone so far astray; after all, the economic theory of private property was well known 30 years ago — but maybe not at Harvard. His book, published in 1958, had a great deal of influence on the explosion in government spending over the next decade. We are still paying a heavy price– in high taxes and poor public services–for Galbraith’s error.

We are now spending much more on the public sector than we were 30 years ago–real government spending has increased from $528 billion in 1958 to $1,640 billion in 1988–yet government services are still shoddy, overcrowded, and poorly maintained. The reason–which Galbraith missed completely–is that shoddiness is inherent in government ownership because of a lack of incentives. Homeowners generally take good care of their property– they paint the house regularly, fix the roof, plant grass and trees, and call a plumber promptly when they discover a leak. Why? Because they are the sole claimants to the property’s value. If they try to sell their property, they will reap the benefits of the house’s good condition or pay a price for its disrepair. Tenants tend to take less care of their homes, though landlords generally check on the condition of the property regularly. Tenants in government housing show the least concern for the condition of their homes–and because there is no owner who would pay a price for the declining value of the property, no one else has much incentive to improve it. And public housing is always in disrepair, to say the least.

Most privately-owned stores are clean and well lit with friendly, helpful clerks–at least compared with, say, the post office. The Postal Service doesn’t seek out rude and indifferent employees; it’s just that neither its clerks nor their supervisors have anything to gain by treating customers well. On a recent trip around the world, I found shop clerks in Shanghai just as indifferent to customers as U.S. postal workers.

It is economic analysis and, more important, such observations that have created a worldwide trend toward privatization. The Thatcher government has sold public housing units to their tenants, sold Great Britain’s largest trucking company to its employees, and sold the telephone company to private shareholders. Japan recently sold its telephone company. New Zealand privatized its national oil company. Nigeria plans to privatize 160 state-owned companies, and Togo intends to sell all of its public-sector enterprises.

Even behind the Iron Curtain, privatization is making inroads. China has in effect privatized agricultural land, and Mikhail Gorbachev has proposed to do the same in the Soviet Union. Cuba has begun allowing tenants to purchase government housing.

Private vs. Public Ownership

On my trip, which took me from South Africa to China (with a few stops in between), I saw some dramatic examples of the differences between private and public ownership, between private opulence and public squalor.

In many ways, apartheid (particularly in South Africa’s black townships) was the purest form of communism the world had ever seen. The government built the townships, where urban blacks are forced to live. It built thousands of small, identical brick houses and assigned people to them with no regard to tribal origin, family relationships, income, or personal preferences. Unlike the residents of a normal town, they could not choose to live near their friends or relatives or people of similar educational or occupational background, nor, of course, did they have property rights. Not only could a tenant not sell his house, the government could and did take it away from him at will. Naturally, the unfortunate residents of Soweto did not see much point in taking good care of the houses.

Recently, however, the government quietly began to allow Sowetans to purchase their homes. The results have been just what one should expect: people are cleaning, painting, and fixing up their houses. The first thing they do is make the house look different from the government issue. They buy a wooden door to replace the standard metal one. They cover the brick wit stucco–a design choice that I found strange until I was told that the brick symbolizes government housing. They buy decorative windows, put a fence around the yard, and even add a room or an upper floor.

Buyers must generally continue living in the houses they already occupy, which leads to the strange phenomenon of a well-kept, newly enlarged house sitting between two ill-kept government hovels. In a freer market, an affluent homeowner would probably move to a better neighborhood–or someone would buy the houses next door and fix them up–but in Soweto he takes advantage of the few options he has and improves his own lot.

There is a section of expensive new homes in Soweto. (Yes, there are rich people in Soweto; South African blacks have at least some opportunity to become rich, but their money won’t free them from the requirement to live in the townships.) A visitor can stand in the middle of this impressive new development and look across the road at the government-provided barracks where single men live under truly appalling conditions. It’s a striking example of private versus public property.

At the other end of the scale from the impressive new houses are the shanties, built by blacks who migrated to the Johannesburg area because there was work there and who were denied accesses to government housing. At first the government bulldozed the shanties, saying that the occupants were illegal squatters. More moderate voices finally persuaded the government that because it was not providing those blacks wit housing (or allowing them to live outside the townships), it should at least leave the shanties alone. So now the shanties are tolerated, but they have no legal right to exist. The residents of the shanties don’t bother to improve them–the government retains the right to expel the occupants or bulldoze the buildings at any time–but inside are appliances and televisions for which electricity is supplied by enterprising neighbors. In other words, Galbraith could find private opulence and public squalor within one small shack; people spend their money on the things they can own.

Obviously, a civilized South African government would repeal the Group Areas Act and let people live wherever they want to live. But the incentives of privatization and property rights can work even in the interstices of freedom overlooked by a repressive government.

China: "One Big Soweto"

In many ways, China is one big Soweto. Housing is owned and allocated by the government. Not surprisingly, the housing stock is old, overcrowded, dirty, and in disrepair. One gets the impression that little has been built and nothing has been washed since the Communist takeover in 1949.

Once again, the market works at the edges. Because of the de facto privatization of agricultural land, rural Chinese are more prosperous than city dwellers. I wads told that two million people come into Shanghai every day to shop and the tourist on Nanjing Road or in No. 1 Department Store wouldn’t doubt it. For obvious reasons, people spend little money on the upkeep of their homes, but many are well dressed, and a Shanghai college student spoke disparagingly of the unfashionable clothes that "we won’t buy" in a state department store. Old habits die hard, though; he explained to me that privately run stores are not permitted on Nanjing Road "because this is the main shopping center."

Appropriately enough, while I was in China for a conference on economic reform, the government announced plans to begin selling houses to the tenants. The professed reason was to dampen demand for appliances, which consumers were spending too much on; I hope that was just a cover story to obscure the fact that the largest Communist government in the world was legalizing private property. Presumably the Chinese government has noticed the success of privatization and property rights in the West; on its doorstep in Hong Kong, Taiwan, and South Korea; and finally in its own rural areas.

If China does in fact privatize a significant amount of its housing, I fully expect that when I return I will see not only housing that has been built since 1949, but older housing that has been repaired and even washed.

From the United States to Soweto to Shanghai, economic forces are the same. Owners have an incentive to take care of their property, but government property is owned by everyone and therefore by no one. It is no mystery that China’s housing is run-down or that America’s infrastructure is falling apart while shiny new office buildings are going up in every U.S. city.

Experience shows that the relationship between private opulence and public squalor is the reverse of what John Kenneth Galbraith concluded. The public sector will always tend to be squalid, which is why leaders around the world– from Margaret Thatcher to Deng Xiaoping–are moving essential services into the private sector. With a little more of this, the whole would could become the affluent society.

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November 1989

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